INSIGHT: Chems warn of weak consumer goods, China as earnings season starts

HOUSTON (ICIS)–Chemical companies have flagged weakness in consumer goods and China in a wave of profit warnings issued before the start of earnings season.

• Few chemical end markets such as aerospace, automobiles and home construction stand out in what is shaping out to be a rough earnings season
• Destocking has intensified in some cases
• A manufacturing recession shows no signs of ending

WEAKENING CONSUMER GOODS
Evonik, Croda, Ashland and Clariant all warned of weakness in business segments that sell into personal-care end markets.

HB Fuller, an adhesives producer, had warned that destocking has started to appear in its consumer-products goods customers. The phenomenon was more pronounced in packaging and beverage labelling markets.

Earlier in June, LyondellBasell said it did not see the normal seasonal increase in demand for consumer goods.

Widespread weakness in consumer goods could extend into surfactants and plastics used in packaging. US contract prices for polyethylene (PE)  stagnated during the first two months of the second quarter.

CHINA’S REBOUND SLOWS
China’s rebound from its COVID lockdown has so far come up short. HB Fuller has abandoned any expectations of a sharp rebound and now sees a slow and prolonged recovery.

The country’s macroeconomics provide plenty of reasons for pessimism.

China’s producer price index (PPI) fell by 5.4% year on year in June. It marked the ninth consecutive decline and the sharpest drop in more than seven years. The country’s consumer price index (CPI), which measures consumer inflation, was flat in June, the slowest pace since February 2021.

The Caixin manufacturing PMI is barely indicating growth. The Caixin manufacturing PMI includes many smaller private companies that are focused on exports.

In June, the official PMI spent its third consecutive month in contraction territory. The official PMI includes many larger state-owned companies.

Market outlooks among the products that ICIS covers in China and the Asia Pacific region are overwhelmingly bad for products as varied as monoethylene glycol (MEG), isocyanates, phthalic anhydride (PA) and melamine.

The prospect of continuing weak demand in China and Asia Pacific not only could drag down exports but also flood the world with material from countries trying to export their way out of a downturn.

Celanese had noted this happening in its fourth-quarter earnings report, where it described Asian producers exporting resins to Europe. This was most prominent for polyoxymethylene (POM), a resin that is also known as polyacetal.

The concerns have spread to Brazil, where the head of the country’s main chemical trade group warned about the threat of Chinese imports.

MANUFACTURING RECESSION
The manufacturing recession that RPM International called earlier in the year shows no signs of relenting.

The US manufacturing PMI remains below 50 for the eighth consecutive month, indicating that the sector had spent those months shrinking.

A chemical company quoted in the PMI report said it looks unlikely that the second half would be better than the first half.

For the eurozone, the manufacturing PMI fell to 43.4 in June, its lowest level since the early days of the COVID-19 pandemic.

BRIGHT SPOTS IN MOBILITY, FACTORIES, CONSTRUCTION
A pandemic-driven backlog in automobiles and airplanes is providing support for demand for these products.

Huntsman and PPG both noted strength in the aerospace sector when the companies discussed their Q1 earnings earlier in the year.

Near the end of June, the CEO of Airbus told the Wall Street Journal that the company cannot make planes fast enough to meet demand.

Similarly, automobiles are benefitting from order backlogs caused by supply-chain disruptions and chip shortages.

Those constraints have ended, and auto producers can get the products they need to build vehicles and meet pent-up demand.

In June, US sales of light vehicles rose 4.0% from May to reach a pace of 15.68m, according to the Bureau of Economic Analysis. Year on year, sales rose by 12.6%.

Chemical producers are highlighting growing demand for electric vehicles (EVs), which consume a larger proportion of plastics and chemicals than similar vehicles powered by internal combustion engines (ICEs).

Electric vehicles were among the few positive end markets mentioned by Cabot, a carbon-black producer.

Rising demand for electric vehicles is causing a corresponding increase in factory construction. RPM said these EV manufacturing plants will require engineered flooring systems, fireproofing, protective coatings and concrete admixtures.

As a whole, the value of manufacturing construction rose by 76.3% in May 2023 year on year, according to the US Census Bureau, the state statistical agency.

For new home construction in the US, builder confidence has swung to optimism in June after nine consecutive months of pessimism.

Builders noted solid demand, improving supply chains and a lack of new and existing housing. Shares of the major US home builders are up, and the nation’s demographics are favourable for house sales.

US housing starts rose month on month in May, but the increase belies the relatively low level of construction activity for single-family homes.

In May, builders started construction on 91,900 single-family houses. On a 12-month rolling average, that came to 74,600 starts, a level typical of the first years of the 1990s. The US exceeded that level every month from April 1992 through May 2008.

The US does have a shortage of housing, but it remains to be seen how many consumers can afford a single-family home at a time of high interest rates and sales prices. It also remains to be seen if home builders can build enough housing to meet demand, given the persistent shortages in labour, material and land as well as restrictive regulations.

CHEMS CUT GUIDANCE
Several chemical producers have lowered their financial forecasts or withdrawn their guidance.

• BASF warned that its second quarter income will fall sharply year on year and quarter on quarter because of lower prices and volumes
• US-based agrochemical producer FMC cut its Q2 earnings outlook by nearly 50% and lowered its guidance for 2023 because of unprecedented destocking
• German producer Evonik cut its full-year earnings guidance by up to €500m
• Clariant lowered its Q2 sales guidance and full-year earnings guidance
• Shell expects to report another quarterly loss in its chemicals sub-segment in the second quarter
• Ashland issued a profit warning for its fiscal third quarter earnings
• LANXESS lowered its Q2 and full year earnings guidance
• US-based carbon black producer Cabot withdrew its fiscal 2023 guidance
• Olin warned that it expects Q2 earnings to fall below its earlier expectations
• Dow cut its Q2 sales guidance

 Insight article by Al Greenwood

Thumbnail shows bottles of household cleaners, a category of consumers goods. Image by Shutterstock.